Saturday, August 25, 2007

Using surpluses to invest rather than cut taxes

The Australian Financial Review (subscription required) and The Australian (here) have run commentaries over the past few days asking why the huge surpluses the Commonwealth Government is accumulating are not simply returned as tax cuts rather than being invested in the stock market via such things as the Future Fund, the Higher Education Endowment Fund or the Health and Medical Investment Fund

It is extraordinary that the government collects revenue from taxes and invests in on our behalf in equities. This is particularly so given that the Government is avowedly free-enterprise and anti-socialist.

The political argument for non-returning the funds is that there is a relatively low political return on giving tax cuts. The 2006 tax cuts gave no boost to the stocks of the government and, in any event, the ‘me-too’ opposition will certainly match any cuts offer from the Government this year. The economic reason is that tax cuts are being withheld because the economy is operating at close to full capacity so that further boosts to public spending will increase the need for interest rate hikes.

Apart from being immoral the political reasons don’t make a lot of sense. Making really significant income and company tax cuts would be politically appealing. The economic reasons are more cogent – investing the resources in equities will reduce the financial claims that retirees and the education sector will make in future generations thereby enabling the fiscal advantage of lower taxes to be deferred to the future when conditions may be less buoyant. But it is a bizarre twist – resources are being held from the private sector because private spending is judged to be too high. Incentives to save have been reduced by the role of superannuation.

Despite their protestations the Coalition Government remains the heaviest taxing party in our post-war history. In part this is a symptom of the commodities boom and the restricted possibilities for investing in additional new infrastructure because the full employment of resources will create excess demand pressures. It makes me profoundly uneasy to have a Government not returning unneeded tax revenues to citizens and firms. Moreover investing funds in stock markets will not have zero inflationary impact - asset prices will be further bid up.

It is our money and if there are no good public sector projects to fund – perhaps because of resource constraints in the economy - then it needs to be given back not invested in equity markets on our behalf.

Update: Slim has posted on this over at the Dog’s Bollocks and Peter Martin with a different angle that emphasises the failure to predict surpluses here.


Slim said...

Harry, I wrote on this issue during the week. It is preposterous that the government should hand this excessive surplus over to the equity markets.

Even if the investment funds such as the Future Fund and the Education Endowment were to survive ten years of equity market fluctuations (what happens if it goes into sustained meltdown?) they may return a $billion or so per annum to spend on much needed infrastructure.

For my two bobs worth, it would be better to spend the $18billion now on ports, rail, education, water and other essential nation-building infrastructure. My guess is that the magnifying economic effect will far outweigh waiting on a dividend each year. Remind me again what happened to the $billion lost by Treasury on the money markets on Costello's watch?

As they say in Bengal - trust no future, however bright.

hc said...

Slim, I agree but there is the short-run macroeconomic situation.

Anonymous said...

Harry,wouldn't returning $17 billion to taxpayers to spend in this overheated economy simply push inflation through the roof? OK, so some taxpayers may actually save their share of the tax cuts. Just as pigs might fly abd Osama bin Laden might convert to Buddhism.

whyisitso said...

"Remind me again what happened to the $billion lost by Treasury on the money markets on Costello's watch?"

Can someone tell me what is the net profit/loss position re Treasury's dealings with foreign currency since 1996?